Everyone is wondering currently, what is really happening in the financial markets?
Economies are in shambles but the Nasdaq just hit its record high on August
19,2020, the Nifty 50 recovered almost all its losses from the bloodbath in March
2020.As a retail investor or even a financial markets student, I am sure one might
have never been so uncertain and confused about the financial markets currently.
Charlie Munger once said “If you’re not confused, I don’t think you understand”. I feel
this is the most suitable quote for the current situation for the market participants.
So, what are we going to discuss in this article?
- We will try and understand the euphoria in the market and the correlation of the
market with positive and negative news.
- We will try and understand why precious metals have hit new highs and have
rallied together with the equity market? Are equity valuations fair at current
- We will try and understand what is in store for India for the coming 10 years. Will
it be the biggest Bull run for our country?
So, as we know our markets hit new highs in the start of 2020, and everyone were
bullish on the Indian equity markets, despite the financial sector not doing so well.
However, we hit a high on the NIFTY 50 of 12540-50 levels. When we were around
these levels more or less, the news of Covid 19 came in, it caused huge panic,
everyone was full of fear, the FIIs (Foreign Institutional Investors) were pulling
money out of equity, shifting it to safer bets in debt markets, although the number of
cases in India were in the mere hundreds, our markets were tumbling like pieces of
The Nifty 50 and Sensex had hit a lower circuit on 23 rd March, 2020.The way the
markets had fallen, everyone was expecting nothing but another lower circuit of 5%.
That surely wasn’t the case, the Government had no option but to intervene and
make sure that our DIIs, for example LIC, UTI, Large Fund houses to put in money
and try to pull back the markets. What we analyze here is there was a sought of over
reaction in the market to that prevailing situation. After hitting the lows, the market
has recovered fiercely, whereas on the flip side the Covid 19 situation was hitting
fiercely all over the world, USA was reporting 4000-5000 deaths a day, Europe was
in shambles too, India initiated a complete lockdown, however one market which
wasn’t locked down was the stock market, it went up irrespective of all the kind of
negative news going around. Why was this happening? Indeed, this is a very difficult
question to answer but I will try my best. So firstly the biggest of companies were
totally shut had no sort of business activities as India was under complete lockdown,
so what we need to understand that business was very less or close to zero,
companies with high fixed costs were suffering, they had no option but to lay off
employees announce pay cuts, manage their expenses very prudently etc., so to a
common man’s understanding it’s clear that there is no sort of rotation of currency in
the country ,and hence it is a Bearish market, but what happened was the complete
opposite , we entered into a positive pullback rally. The Federal Reserve was
pumping in huge amounts of money, to be precise 2.3 -2.5 trillion dollars was
pumped in the economy and I had heard this in one of the interviews with a market
veteran Mr. Manish Chokani, that for every billion dollars, the U.S markets will move
up by a point and it gained 2000 points and made new highs, and it is rightly said
that never bet against the Fed. However, to sustain the gains would be difficult. On
the other hand, we had our Indian Government announcing a stimulus package of
20,000 crore rupees to revive the economy, so the economies were flushed in with
cash, to drive liquidity, and these two were one of the few reasons as to why we saw
a pullback rally in the global markets.
Secondly in India, we all Indians were at home, and have literally nothing to do and
rightly so there was nothing on to do except the financial markets.
People who were always eager to know or join the markets, had a perfect entry point
at the lowest levels in end of March 2020, and they have rightly done so from March
to June 2020, I can say this with surety as if you see the number of Demat Accounts
opened in these last few months, the numbers are astonishing. Zerodha the number
1 ranked broking firm said they added 3 lakh new customers in a span of 60 days
and 65-70 percent of them were new investors. By saying this what I am trying to
explain is that a fair and good amount of money came in from the retail investors,
which have driven the market forces.
After a sharp pullback rally everyone wondered is the steam over or is there
something yet in store, and yes there was something in store, I could call that
“Hopes and Expectations”, our market rallied even further, with an expectation of
vaccine developments, whereas on the flipside our Covid 19 cases are hitting record
highs, economies have partially been unlocked, and more and more businesses
were getting in trouble. However, with hope and expectations of the economy kick
starting, banks receiving some kind of interest from the loans given out, vaccine
developments, our market was hitting positive notes rapidly, in tandem with the U.S
markets. Again, doesn’t this cause some sort of confusion? There is a famous
formula by the Oracle of Omaha, Mr. Warren Buffett, which is country’s market
capitalization to its GDP, and currently on August 17,2020 USA markets stand at
around 178%, which is highly overvalued, and which clearly shows, that the stock
markets are due for a good correction.
However, the Indian markets stands at 64% which yet indicates there is scope for an
upside and is modestly undervalued. But then there will be one more question in all
our heads, once the vaccine will be produced, businesses will start again, rotation of
currency will begin, so wont it be positive for the market because everything will be
normal. According to me, where I can be completely wrong, but what will happen is
once everything will be over and back to normal, the Euphoria will end, the hopes
and expectations will be fulfilled and, we will be at ground reality, knowing that our
economy is not doing well, that our GDP has reduced drastically, Banks not
receiving the money as per expectations after the moratorium period ends, and it
could be nothing but a correction in the market.
So, as we can see it’s such a mixed bag that on negative news and data our markets
are rallying positively, and I can assure you that this has caused utter confusion in a
retail and a young investors mind.
My second part of discussion in this article is, the soaring prices of precious metals
alongside the uptrend in the stock market. One should know that usually Gold and
Equity share an inverse relationship, which means if Equity markets are positive,
gold will be negative and vice versa, but to everyone’s surprise, both were going in
the same direction. Gold and Silver soared at 56,000 and 75,000 approximately
respectively. Why was this happening? Again, this is a very difficult question to
answer but I will try my best. Gold is a sort of defense in one’s portfolio, it’s a sort of hedge against inflation, and to beat the time value of money. Mr. Warren Buffet
squared off a percentage of his holding in Wells Fargo and JP. Morgan Chase and
invested it in Barrick Gold Miners, which is the second largest mining company
globally, and is listed in the U.S securities market. He invested around half a billion
dollars, around 560 million dollars.
The Oracle of Omaha never believed in putting money in gold, but this move was
surprising to all. Usually this would indicate nothing but sort of economic uncertainty
and lack of confidence in the macro data. It is pretty evident even in our markets the
interest rates have fallen drastically, cheap money is available, the stimulus package
has caused more money infusion in the market, and this in turn would erode the
value of money and in turn would lead to inflation.
So, what drove both equity markets and metals were two different forces. Gold and
Silver were driven by inflation concerns, whereas equity markets were driven
because the debt markets are in a bad shape right now, there are practically no yield
returns, and are running at a high P/E ratio of 150 times, whereas the index is
anywhere between 27-30 times, and liquidity support too, so it is a no brainer that
one would show interest in equity.
As of August 19, 2020, Nasdaq hit a record high, S&P500 covered all its Covid19
losses and stands at pre-Covid19 levels, our Indian markets have recovered almost
all its losses and recovered 50 percent from its March lows, and gained
approximately 4000 points on the Nifty50.So is it advisable for one to invest right
now in such uncertainty and ambiguity? Are the valuations fair? that all depends on
your own thought process backed by adequate data and detailed analysis. However,
what the current scenario suggests, is that the market is due for some correction as
ground reality hasn’t hit yet and has spiked up in a very short period of time. One can
wait and watch how the market behaves in the near future.
Lastly we will try and discuss about the future of Indian financial markets. Will we be
in the biggest bull run for the next decade, and come across as the strongest
As we all know during this pandemic a lot of overseas companies have invested in
India. The most known example to all can be the record fund raising done by
Reliance Industries, getting Facebook, Google, Qualcomm, Silver Lake Partners,
ADIA and so on. When would such big names invest in a country and a company?
only if they find something positive in the country, and if they think so, we are nobody
to bet against that! Google had also announced that they would invest 10 billion
dollars in India as in time comes for a digital future.
Another reason as to why we can flourish in the coming years is because there is a
lot of negative sentiment against China, and other countries want to reduce their
exposure to them, and shift their operations to another country, and there is no better
option available than India. As on August 19,2020 Apple INC, are going to
manufacture the iPhone 12 in India, Amazon building its largest office space globally
in Hyderabad and many more, this is just the beginning.
A new campaign launched by our Hon. Prime Minister Narendra Modi,
‘Aatmanirbhar’ Bharat, which basically means self-reliant, is only going to do better
for the country, which will in turn reduce our imports exposure and increase our
exports to other countries. All the market veterans too support the fact that we do
have exciting times ahead for our country. The only thing we can do is sit and
observe and take actions at the appropriate time and remain patient.
The future of India can and will be very bright and we have the capability of coming
across as one of the strongest emerging markets.
I would like to conclude by quoting Mr. Benjamin Graham” In the short run, the
market is a voting machine, but in the long run it is a weighing machine”.
- Tanay Shah, TYBFM